Whitaker, Chalk, Swindle & Sawyer, L.L.P. 

Attorneys at Law 

 301 Commerce Street, Suite 3500 

Fort Worth, Texas 76102-4186 

 (817) 878-0500 

Metro (817) 429-6268 www.whitakerchalk.com John R. Fahy 

Direct Dial (817) 878-0547 jfahy@WhitakerChalk.com 

99999-00002 

January 11, 2011 

Via e-mail to: e-ORI@DOL.GOV

Office of Regulations and Interpretations 

Employee Benefit Security Administration 

Room N-5655 

U.S. Department of Labor 

200 Constitution Avenue NW 

Washington, DC 20210 

100 F Street, N.E. 

Washington, DC 20549-1090 

Re: Definition of Fiduciary Rule Proposal 

Ladies and Gentlemen: 

 This letter is submitted in response to the request for comments by the Employee Benefit 

Security Administration (“EBSA”) in Release No. RIN 1210-AB32 (the “Rule Proposal”). In 

the Rule Proposal, EBSA has proposed to revise 29 CFR §2510.3-21(c) relating to the definition 

of a fiduciary under the Employee Retirement Income Security Act (“ERISA”) which expands 

the definition of “fiduciary” to persons, including securities broker-dealers who have not been 

designated as an ERISA “fiduciary” since the passage of ERISA more than 35 years ago. 

 Each of the undersigned is a member of the Securities Committee (the “Committee”) of 

the Business Law Section (the “Section”) of the State Bar of Texas. Mr. Waller is also the 

Chairman of the Securities Committee of the American Association of Attorney-Certified Public 

Accountants. Several of us advise securities brokers and dealers. Please note that the comments 

expressed in this letter represent the views of the undersigned only and do not represent the 

views of their colleagues, clients or law firms or the official position of the State Bar of Texas, 

the Committee, the Section, or of the American Association of Attorney-Certified Public 

Accountants. None of the undersigned are being compensated, directly or indirectly, for our 

work on this comment submission. 

Background 

The Rule Proposal, among other things, provides that a person is a fiduciary if that person 

makes a recommendation as to the advisability of investing in, purchasing, or selling securities or 
Office of Regulations and Interpretations 

Employee Benefit Security Administration 

January 11, 2011 

Page 2 of 30 

other property for a fee or other compensation directly or indirectly to an employee benefit plan, 

plan fiduciary or plan participant or fiduciary and the recommendations are made pursuant to an 

agreement, arrangement or understanding, written or otherwise, between the person and the plan, 

plan fiduciary or plan participant or beneficiary in connection with making investment decisions 

or management decisions with respect to plan assets and will be individualized to the needs of 

the plan, plan fiduciary or plan participant or beneficiary. This broad definition appears to be 

intended to encompass routine broker-dealer transactions and provides a great amount of 

uncertainty as to what is covered and what is not covered. Further, it seems to be premised on a 

model of broker-dealer services that is different than the models we have experienced. 

EBSA’s rules currently have an exemption from the definition of ERISA fiduciary for 

SEC-licensed securities brokers and dealers solely in their capacity as the executor of 

instructions relating to securities transactions during the ordinary course of its business as a 

broker or dealer. This broker-dealer transaction exemption is limited to brokers and dealers who 

are neither the fiduciary nor an affiliate of the fiduciary and the instructions specify the security 

to be purchased or sold, the price range for the transaction, a time span not to exceed five days to 

execute the transaction, and the minimum and maximum amount of the securities to be 

purchased. 29 CFR §2510.3-21(d)(1). Note that this transactional exemption is not available if 

the broker or dealer is deemed to be a fiduciary due to a “recommended” securities transaction 

involving plan assets. 

If named a fiduciary, the broker-dealer will have responsibilities under 29 USC §1104. 

Specifically, the broker-dealer will be required to discharge its duties: 

solely in the interests of the participants and beneficiaries and for the exclusive 

purpose of providing benefits to participants and beneficiaries and defraying 

reasonable expenses of administering the plan. 

Fiduciaries are also required to exercise: 

the care, skill, prudence, and diligence under the circumstances then prevailing 

that a prudent man acting in a like capacity and familiar with such matters would 

use in the conduct of an enterprise of like character and with like aims. 

Fiduciaries are further required to diversify “the investments of the plan so as to minimize the 

risk of large losses, unless under the circumstances it is clearly prudent not to do so.” Finally, 

ERISA requires fiduciaries to act “in accordance with the documents and instruments governing 

the plan.” 

 Fiduciaries are also required to not engage in prohibited transactions under 29 USC 

§1106. Those prohibited transactions include: 

1) selling, leasing or exchange any property between the plan and a party in interest; 

2) lending money or other extension of credit between the plan and a party in interest; 
Office of Regulations and Interpretations 

Employee Benefit Security Administration 

January 11, 2011 

Page 3 of 30 

3) furnishing goods, services, or facilities between the plan and a party in interest; 

4) transferring to or using for the benefit of any party interest any assets of the plan; 

5) fiduciaries dealing with the assets of the plan in their own interest or for their own 

account; 

6) fiduciaries transacting business with the plan on behalf of a party whose interests are 

adverse to the interests of the plan or its participants or beneficiaries; and 

7) receiving consideration from any party dealing with the plan in connection with a 

transaction involving the assets of the plan. 

One of the exemptions from the prohibited transactions standards involved traded 

securities. 29 USC §1108(b)(16) provides an exemption from prohibited transactions for 

securities trades executed through SEC or CFTC regulated trading systems subject to best 

execution regulatory requirements in which the trading systems do not take the identity of the 

parties into account and the price of the securities and the compensation for the trade are 

consistent with arms-length transactions. Because these trades must pass through a regulated 

trading system, the securities trades covered by this exemption are agency trades.1

 

There are also exemptions for certain large block trades (29 USC §1108(b)(15)) and cross 

trades for plans of $100 million or more in assets. (29 USC §1108(b)(17)) The cross-trade 

exemption does not allow the payment of commissions. 

This ERISA prohibited transactions exemption only covers one very narrow aspect of a 

broker-dealers business with a customer – on-exchange agency trades. Many other services that 

broker-dealers routinely do for plan-related customers would be barred as a prohibited 

transaction. Those prohibited activities would include: 

1) Principal trades - Unlike investment advisers, broker-dealers have no 

substantive restrictions on principal trades other than the disclosure 

requirements of SEC Rule 10b-10, the best execution requirements of NASD 

Rule 2320, the interpositioning limitations under NASD Rule 2111 and the 

markup limitations in NASD Rule 2440. Broker-dealers routinely engage in 

principal transactions and mark such trades as principal trades on the trade 

confirmation. But, a broker-dealer cast as an ERISA fiduciary would be 

barred from filling a trade order with an otherwise perfectly legal and 

disclosed principal trade settlement, even when such a settlement could be 

obtained at a better price than through the market. 

2) Margin Loans – ERISA fiduciaries may not loan money to plans or their 

participants or beneficiaries, which would include a margin loan. The broker-

 

1

 Investment advisers are barred from acting as a principal on their own account in client trades under Section 206(3) 

of the Investment Advisers Act of 1940 (15 USC § 80b-6(3)) without the informed consent of the client except for 

agency cross-trades allowed under SEC Rule 206(3)-2. ERISA also allows certain cross-trades by investment 

managers. 29 USC §1108(b)(19); 29 CFR 2550.408b-19. 
Office of Regulations and Interpretations 

Employee Benefit Security Administration 

January 11, 2011 

Page 4 of 30 

dealer trade exemption from prohibited transactions in 29 USC §1108(b)(16) 

makes no reference to margin loans. 

3) Margin Accounts – ERISA fiduciaries may not provide credit facilities to 

plans or their participants or beneficiaries. 

4) Short Sales – Short sales involve borrowing securities and thus require a 

margin account. 

5) Option Trades –Under securities laws uncovered option trades require a 

margin account. 

6) Overdraft Protection – While there is an exemption from prohibited 

transactions for banks under 29 USC §1108(b)(6), broker-dealers are not 

banks and may not fall within that exemption for quasi-bank like services 

such as check clearing and overdraft protection. 

7) Stock Lending – Broker-dealer customers can make money by allowing their 

assets to be borrowed by broker-dealers for loans to short-sellers. This 

interest income can boost returns. But, plans lending assets to fiduciaries are 

prohibited transactions under ERISA. 

8) Soft Dollars. Soft dollars are the research and data provided by brokerdealers designated as fiduciaries to investment advisers under soft dollar 

arrangements furnishing goods, services, or facilities by a fiduciary to an 

ERISA party in interest. The safe harbor from fiduciary duties in Section 

28(e) of the Securities Exchange Act of 1934 applies to registered investment 

advisers but not to broker-dealers. 

9) IPOs. IPOs are generally firmly underwritten, so plans would purchase IPO 

shares from the broker-dealer acting as underwriter rather than the issuer. 

This would be a prohibited transaction under ERISA. Since IPO transactions 

are almost always “recommended” transactions, Plans will be barred from 

having access to IPO allocations. 

10) Secondary Public Offerings. Secondary offerings are firmly written offerings 

by issuers who have previously been involved in the public securities markets. 

Like IPOs these are generally firmly underwritten offerings. Plans would be 

prohibited from participating in these offerings under ERISA because 

secondary public offering transactions are almost always “recommended” 

transactions. 

11) Trade Error Accounts. Error accounts take securities from busted trades into 

or out of an error account on the broker-dealers books. The trades may be 

busted for a variety of reasons, including previous trade execution errors. In 
Office of Regulations and Interpretations 

Employee Benefit Security Administration 

January 11, 2011 

Page 5 of 30 

any event, the purchase or sale would be directly to or from the ERISA 

fiduciary and thus be a barred business transaction directly with the plan. 

12) Issuer-Affiliated Broker Dealers. Some broker-dealers are established to sell 

affiliated products, such as a broker-dealer owned by a real estate syndicator 

or hedge fund. If the broker-dealer is deemed a fiduciary, then all sales of 

affiliated products would be barred as fiduciary-related party transactions. 

13) Mutual Fund Trailers and SEC Rule 12b-1 fees. Under the interpretive 

bulletin at 29 CFR §2509.75-3 an investment by a plan in an investment 

company registered under the Investment Company Act of 1940 does not, by 

itself, cause the investment company, its investment adviser, or its principal 

underwriter to be deemed a fiduciary or a party in interest for the plan under 

ERISA unless the plan covers the employees of the investment adviser. But, 

this interpretive bulletin does not cover whether a broker who recommends a 

mutual fund transaction and receives trailers or SEC Rule 12b-1 fees 

corresponding to the amount of plan assets invested in the investment 

company is receiving consideration from any party dealing with the plan in 

connection with a transaction involving the assets of the plan. 

These are just a few of the broker-dealer services and functions that would be unavailable 

to plans, their participants and their beneficiaries under the Rule Proposal. This list is not 

intended to be comprehensive and we are not suggesting that crafting an exemption for each of 

these items will resolve these issues. Indeed, the dramatic effect that the prohibited transactions 

list would have on broker-dealers calls into serious question whether Congress in 1974 intended 

that the definition of ERISA fiduciary and ‘investment advice” to include broker-dealers because 

Congress barred many of the services that broker-dealers provide. In 1974 broker-dealers 

provided principal trades, margin accounts, options and stock lending to ERISA-covered plans. 

According to FINRA, the securities broker dealer industry has nearly 4,620 brokerage 

firms, 165,920 branch offices and 636,340 registered securities representatives. The Rule 

Proposal, as stated, would have a significant and deleterious effect on the industry by causing 

disruptions with millions of customer account relationships. 

Further, as the Rule Proposal acknowledges in its “Costs” section that it is procedurally 

difficult to treat services provided for plans different from other services provided to customers. 

Consequently, the above prohibited transactions list may have substantial carryover into nonplan customer accounts. The Rule Proposal said: 

The Department believes that service providers will need to review their entire 

book of business, not each individual transaction or a plan-by-plan review, to 

determine whether they are fiduciaries, because service providers will enter into 

agreements with plans to provide similar types of services. 
Office of Regulations and Interpretations 

Employee Benefit Security Administration 

January 11, 2011 

Page 6 of 30 

Thus, EBSA expects that the securities broker-dealer industry will need to apply some of the 

prohibited transaction restrictions to all its customers because of logistical problems in treating 

plans differently from other customers. 

Designating a Securities Broker a Fiduciary for “Recommending” or “Advising” about a 

Securities Transaction Leads to Effects that Will have a Negative Effect on Plan Options 

Consider, for example, a small business such as a flower shop that has a profit-sharing 

plan. The flower shop owner due to years of service has a majority in interest in the plan and 

serves as the plan administrator. The plan administrator becomes absolutely convinced that the 

price of gold is going to increase substantially in the near future and that other types of 

investments will be subject to steep declines because of the poor performance of the economy 

and vast deficits which devalue the US dollar. The broker does not share that opinion and tells 

the customer so. Nevertheless, the customer wants a presentation of options that would allow 

him to take a position that would capitalize on the anticipated increase in the price of gold. The 

broker then presents various options including gold-related futures contracts, gold mining stocks, 

and gold-related exchange traded funds and discusses the pros and cons such as comparative 

volatility, leverage, risk of capital calls, and other relevant considerations. After being fully 

informed the customer chooses one of the options and the broker makes the purchase on the 

customer’s behalf with the trade marked as “solicited” on the trade blotter. The price of gold 

then declines and the ERISA-covered customer loses money. Under the Rule Proposal would 

the broker have acted as a fiduciary in such a transaction? If the customer sets the investment 

parameters and seeks options within those parameters is presenting those options a 

recommendation or advice? Is this the kind of recommendation or advice that EBSA is targeting 

under the expansion of the fiduciary standard? Is this the kind of activity that a broker should be 

liable for damages based on the market conditions outside of its control relating to the decline of 

the price of gold? 

To bring this example one step forward, assume that the customer decided to purchase 

the gold mining stock. 

1) Can the broker’s broker-dealer execute the trade order on a principal basis? 

That would depend on whether the broker was an ERISA fiduciary or not, 

which is uncertain. ERISA fiduciaries are barred from engaging in selfdealing with plans and a broker-dealer selling a security out of its inventory, 

even if sold at prevailing market prices, would be self-dealing with the plan. So 

principal trades would be forbidden, even if the securities could be closed at 

better net prices than agency trades through a securities exchange. 

2) Can the purchase be done with margined funds or in a margin account? That 

would also depend on the uncertain determination of whether a broker was 

providing advice or making a recommendation under the presented fact 

situation. Margins are loans against the securities assets held in the securities 
Office of Regulations and Interpretations 

Employee Benefit Security Administration 

January 11, 2011 

Page 7 of 30 

broker-dealer accounts and loans from ERISA fiduciaries to serviced plans are 

prohibited transactions under ERISA. 

3) Can the customer hedge the gold position with a countervailing short sale or 

put option? That also depends on the uncertain determination of whether the 

broker was determined to be a fiduciary under ERISA. Short sales and put 

options require margin accounts which are a credit facility to provide loans on 

demand against assets held in the customers account. Margin accounts and 

such credit facilities to or from ERISA fiduciaries to plans are prohibited 

transactions under ERISA. Further, the short sale or put option would be 

barred if the broker-dealer is the counter-party. 

4) Is there a disclosure that can be provided under the Rule Proposal to clear this 

up? 

a) No - The Rule Proposal has a disclosure safe harbor that relies upon 

the customer’s subjective perception and understanding or what would 

be deemed the customer’s reasonable subjective perception or 

understanding. If the broker provided a comprehensive disclosure of 

all relevant conflicts, it would still be required to prove that the 

customer understood it or reasonably should have understood which in 

practical terms is an unsustainable burden and highly divergent from 

the standard for a broker-dealers disclosure responsibilities under 

federal securities laws. Those disclosure requirements contain no 

provision relating to needing to prove the customer’s subjective or 

reasonable understanding. 

b) No – The Rule Proposal’s disclosure safe harbor only applies when a 

broker is operating as the disclosed agent of the counterparty. There 

is no disclosure safe harbor when a customer has ordered the brokerdealer to go out and execute a specific trade on its behalf as an agent. 

5) Is the flower shop’s plan business the kind of business that a typical brokerdealer would support under the Rule Proposal? No, the broker-dealer’s legal 

and compliance departments will likely determine that it cannot offer trading 

or margin services to such accounts given the uncertainty as to whether such a 

transaction would cause it to be an ERISA fiduciary to the Plan with attendant 

liability should the price of gold decline and that the uncertainly cannot be 

cured by the safe harbor disclosure because of the broker-dealer’s agency 

position and because of the subjective understanding requirement in the safe 

harbor disclosure. 

EBSA should seriously consider the scope and ancillary effects of the Rule Proposal and 

whether it really needs to apply to the broad scope of the securities broker-dealer industry given 
Office of Regulations and Interpretations 

Employee Benefit Security Administration 

January 11, 2011 

Page 8 of 30 

that the securities brokers and dealers are already heavily regulated by the SEC, by state 

securities regulators and by self-regulatory organizations, including FINRA under a regulatory 

scheme built up through 75 years of experience and experimentation. Seeking to regulate an 

already regulated industry requires a deep understanding of the business lines, standards and 

practices of that industry. We are concerned that the broad stroke of the Rule Proposal as to 

securities brokers and dealers imposes costs and liabilities in areas in which there will be no 

benefit. Finally, the application of ERISA fiduciary requirements to broker-dealers would mean 

that many of the services provided to ERISA-covered customers would be unavailable including 

margin accounts, short selling, principal trading, repurchase agreements, access to underwritten 

initial or secondary offerings, overdraft protection, revenue from securities lending and access to 

products affiliated with broker-dealers. The loss of these services would have a substantial net 

negative impact on the performance of plans. 

The Rule Proposal also does not recognize the broad scope of broker-dealer requirements 

and types of broker-dealers. Section 15(a) of the Securities Exchange Act of 1934 mandates the 

registration of a broad scope of persons as brokers and dealers. It covers all those who “effect 

any transactions in, or . . . induce or attempt to induce the purchase or sale of . . . any security” in 

interstate commerce. Thus, besides the general retail broker-dealers activities referenced above, 

there are numerous specialized broker-dealers. For example some broker-dealers are set up to 

sell affiliated products, such as a broker-dealer owned by a real estate syndicator or hedge fund. 

If the broker-dealer is deemed a fiduciary, then all sales of affiliated products would be barred as 

a related party transaction. Perhaps in that case there may be some protection in the safe harbor 

disclosure because such brokers act as the agent for the counterparty issuer. But, as stated above, 

the subjective standard in the safe harbor makes the standard practically unworkable and the 

Rule Proposal will have the possible effect of shutting down many of these investment 

opportunities for plans and bring substantial harms to the syndicators and their broker-dealers. 

As a result, while Federal securities laws would require these proprietary syndicators to have a 

broker-dealer, but having a broker-dealer would effectively bar them from selling to ERISAcovered customers. 

The Rule Proposal eliminates mutual understanding and regular basis requirements. 

Thus, a broker who provides any kind of client service may become a fiduciary, whether or not it 

is necessary for the scope of the fiduciary rule to apply to that type of client. Further, because 

mutual understanding is not required, if any investment loses money, the customer could always 

allege that there was no such understanding on its part thus causing the broker to be a fiduciary, 

regardless of disclosures or other information provided. While the rule has a disclosure safe 

harbor, it is an affirmative defense in which a defendant would have to demonstrate the state of a 

customer’s subjective knowledge. So, in sum the disclosure safe harbor provides no effective 

safe harbor at all to such claims that a person is an ERISA fiduciary. When combined with the 

elimination of the mutual understanding requirement, these accounts become too risky to service 

at current commission levels. Substantially higher commissions for plan transactions should be 

expected due to the extra risk. 
Office of Regulations and Interpretations 

Employee Benefit Security Administration 

January 11, 2011 

Page 9 of 30 

Because of the Rule Proposal’s 20/20 hindsight approach, lack of requiring mutual 

understanding and customer’s subjective knowledge requirement in the disclosure safe harbor, 

the Rule Proposal, broker-dealers compliance departments will assume that they will be treated 

as ERISA fiduciaries for any ERISA-covered account. Because broker-dealers practically 

cannot expect to be able to enforce a completely different set of written supervisory procedures 

depending on whether the customer or account is covered by ERISA or not, the procedures will 

apply to all accounts. For example, a broker-dealer may have an account for the floral shop 

small business. There may be an account relating to operating reserves that is not covered by 

ERISA and there may be a profit-sharing plan account that is covered by ERISA. Further, the 

floral shop owner may also have a personal account. If the broker during a routine conversation 

about the operating reserves account or the personal account receives a question from the 

customer about the profit-sharing account, the broker handling the account will not be able to 

switch hats in mid-conversation. Instead, the broker must stop, fax over an extensive detailed 

disclosure as to the customer’s subjective understanding, ask the floral shop owner/plan 

administrator to sign it and fax it back, and then pick up the conversation later. Since brokerdealer compliance directors and general counsels do not really anticipate that this is a likely 

scenario, they will just need to apply ERISA-required procedures to the whole panoply of 

broker-dealer businesses and all related customer accounts in order to comply with the fiduciary 

standards under ERISA. 

Disclosure Safe Harbor 

The Rule Proposal’s disclosure safe harbor will be of little help in allowing a brokerdealer to offer some of the above-referenced services. Instead of saying that a disclosure that the 

broker-dealer is not an ERISA fiduciary is sufficient, it focuses on the plan’s, plan fiduciary’s, or 

plan participant’s or beneficiary’s subjective knowledge. And if the plan, plan fiduciary, plan 

participant or plan beneficiary denies knowledge, the burden is on the broker-dealer to: 

demonstrate (that the plan, plan fiduciary, plan participant or plan beneficiary) 

knows, or under the circumstances, reasonably should know that the person 

providing the advice or recommendation in its capacity as a purchaser or seller of 

a security or other property, or as an agent of, or appraiser for, such purchaser of 

seller, whose interests are adverse to the interests of the plan or its participants or 

beneficiaries, and the person is not undertaking to provide impartial investment 

advice. 

Broker-dealer compliance departments and general counsel departments will not risk 

their business operations to draconian remedies for prohibited activities under ERISA based on 

being able to prove a customer’s subjective understanding. Under the Rule Proposal, a standard 

disclosure accepted by the securities industry, such as a SEC Rule 10b-10 trade confirmation, 

would not be accepted as meeting the disclosure requirements. Instead the broker-dealer will 

need to demonstrate that the customer subjectively knew or reasonably should have known the 

information on the Rule 10b-10 trade confirmation. 
Office of Regulations and Interpretations 

Employee Benefit Security Administration 

January 11, 2011 

Page 10 of 30 

And what would the result of not being able to prove that subjective element on a post 

facto basis? A broker-dealer that provides a margin loan may not be able to collect or to 

foreclose on the pledged collateral because such loans are barred between ERISA fiduciaries and 

plans. Plus, there are countless other broker-dealer business services that would have similar 

problems as described above. So, broker-dealers’ default position will likely be to deny plans 

access to these services. 

Further, this proposed disclosure does not provide any safe harbor for agency trades. So, 

any broker-dealer providing agency trade services will not be able to disclose away its fiduciary 

status. This causes problems because having a fiduciary status would bar principal trades. And 

if both principal trades and agency trades end up being effectively barred under the Rule 

Proposal because the broker-dealer is deemed to be a fiduciary if it undertakes agency trades and 

as a fiduciary is barred from undertaking principal trades, then there will be many broker-dealers 

that refuse to do business with such customers. The market offerings to ERISA-covered 

customer will become much more limited. 

Consequently, we suggest that if EBSA considers a disclosure safe harbor that it use an 

objective standard rather than a subjective standard in order to provide certainty as to the effect 

of the disclosure to industry participants. We also suggest that the disclosure also be permitted 

for transactions in which the broker or dealer is not explicitly acting as an agent for the 

counterparty. 

In other contexts the SEC has approved of objective disclosure requirements in the 

securities industry without requiring proof that the reader subjectively understood it. The entire 

premise of the securities registration process under the Securities Act of 1933 and the periodic 

reporting obligations under the Securities Exchange of 1934 is based on disclosure. Issuers do 

not need to be able to prove that the recipient actually read the disclosure. Indeed, the SEC has 

said that the broker-dealers are not required to deliver prospectus relating to previously reporting 

companies. See SEC Rule 174. (17 CFR §230.174). In another example, Congress provided as 

safe harbor for forward-looking statements under Section 27A of the Securities Act of 1933 (15 

USC §77z-2) and Section 21E of the Securities Exchange Act of 1934 (15 USC §78u-5). In 

drafting a disclosure safe harbor, Congress did not require proof of subjective understanding by 

the recipient because it knew that such a requirement would make the disclosure safe harbor not 

really a safe harbor at all. Consequently, EBSA should consider removing all references in the 

Rule Proposal’s disclosure safe harbor that require a broker-dealer to “demonstrate” that the 

customer: 

knows, or under the circumstances, reasonably should know that the person 

providing the advice or recommendation in its capacity as a purchase or seller of a 

security or other property, or as an agent of, or appraiser for, such purchaser of 

seller, whose interests are adverse to the interests of the plan or its participants or 

beneficiaries, and the person is not undertaking to provide impartial investment 

advice. 
Office of Regulations and Interpretations 

Employee Benefit Security Administration 

January 11, 2011 

Page 11 of 30 

Instead, a disclosure that the advice or recommendation is in the capacity as a purchase or seller 

of a security or other property or as an agent of a party other than the plan, the plan 

administrator, or the plan participants or beneficiaries. 

Definition of “Recommendation” 

 The Rule Proposal has the fiduciary status determination pivot on whether a service 

provider makes a recommendation or not. While we realize that the word “recommend” is 

derived directly from the ERISA statutory language we view “recommend” is a very vague word 

with multiple meanings and an unclear meaning in the Rule Proposal.2 The Rule Proposal 

should have a specific definition as to what it means. This is especially relevant to the Rule 

Proposal’s use of “recommend” to determine whether a securities broker or dealer is a fiduciary 

because “recommend” is just not a term that is used with an accepted common meaning in the 

broker-dealer industry. Broker-dealers mark trade blotters with whether a trade is solicited or 

unsolicited. A solicited trade does not necessarily mean a recommended trade. Those are not the 

same thing. For example, it is common for a customer to state the parameters of the type of 

investment he or she would like to make. The broker then presents several options, thus 

soliciting the trade, and the customer then chooses the appropriate option based on its own 

parameters. Such conversations would typically include descriptions of the various investment 

options. It is a misunderstanding that every solicited trade is a broker calling up a customer 

saying that “You should buy this security.” 

 Further, is it EBSA’s intent to impose a fiduciary duty when a customer sets the 

investment parameters, including investment parameters that the broker may disagree with, is 

presented with a range of different opportunities within those parameters, and then chooses one? 

Should a broker be liable as an ERISA fiduciary if the value of the security subsequently 

declines? The use of the word “recommend” does not sufficiently describe the give and take that 

goes on in discussing a range of possible investments with brokers. And it relies on a model that 

differs from the broker acting as an agent to fulfill the investment decisions of the customer that 

the customer makes of its own volition. 

Timing – Upcoming SEC Consideration of Fiduciary Standard for Brokers 

As described above, under the Rule Proposal plans would lose access to numerous 

broker-dealer services due to ERISA’s prohibitions. This shows that the Rule Proposal needs 

more consideration and is premature. Indeed, we suggest that EBSA seriously consider 

refraining from imposing a fiduciary duty on securities broker-dealers until it understands what 

 

2

 According to Dictionary.com, “recommend” can mean any of the following: 

1) to present as worthy of confidence, acceptance, use, etc.; commend; mention favorably; 

2) to represent or urge as advisable or expedient; 

3) to advise, as an alternative; suggest (a choice, course of action, etc.) as appropriate, beneficial, or the like; 

and 

4) to make desirable or attractive. 
Office of Regulations and Interpretations 

Employee Benefit Security Administration 

January 11, 2011 

Page 12 of 30 

the Securities and Exchange Commission will do in regards to fiduciary duties and broker 

dealers. 

 The Dodd-Frank Wall Street Reform and Consumer Protection Act passed in July 2010 

included a provision in Section 913 of the Act that required the SEC to study whether to impose 

a fiduciary standard on securities brokers and dealers. Congress also provided explicit authority 

to the SEC to impose such a fiduciary duty by rule. The Act adds Section 15(k)(1) to the 

Securities Exchange Act of 1934 which now says: 

Notwithstanding any other provision of this Act or the Investment Advisers Act of 

1940, the Commission may promulgate rules to provide that, with respect to a 

broker or dealer, when providing personalized investment advice about securities 

to a retail customer (and such other customers as the Commission may by rule 

provide), the standard of conduct for such broker or dealer with respect to such 

customer shall be the same as the standard of conduct applicable to an investment 

adviser under section 211 of the Investment Advisers Act of 1940. The receipt of 

compensation based on commission or other standard compensation for the sale 

of securities shall not, in and of itself, be considered a violation of such standard 

applied to a broker or dealer. Nothing in this section shall require a broker or 

dealer or registered representative to have a continuing duty of care or loyalty to 

the customer after providing personalized investment advice about securities. 

Note that Congress limited the possible fiduciary standard for broker dealers to retail customers. 

No such limitation was included in the Rule Proposal despite this clear indication of current 

Congressional intent. 

 The Act followed this provision with the new Section 15(k)(2) of the Securities Exchange 

Act of 1934 which now says: 

Where a broker or dealer sells only proprietary or other limited range of products, 

as determined by the Commission, the Commission may by rule require that such 

broker or dealer provide notice to each retail customer and obtain the consent or 

acknowledgment of the customer. The sale of only proprietary or other limited 

range of products by a broker or dealer shall not, in and of itself, be considered a 

violation of the standard set forth in paragraph (1) 

This shows that Congress understood that syndicators who provide a limited scope of products 

are representing counterparties, should disclose that role, and that having a limited scope of 

products, even affiliated products, will not be a violation of any broker-dealer fiduciary duty 

standard. 

 The SEC promptly followed up the passage of the Dodd-Frank Act by seeking comments 

on duties of care by securities broker-dealers to retail customers. SEC Release No. 34-62577 

(July 27, 2010) (http://www.sec.gov/rules/other/2010/34-62577.pdf). Comments were closed on 
Office of Regulations and Interpretations 

Employee Benefit Security Administration 

January 11, 2011 

Page 13 of 30 

August 30, 2010. The comment request generated hundreds of comments 

(http://www.sec.gov/comments/4-606/4-606.shtml#comments) and the SEC is now considering a 

rulemaking proceeding relating to fiduciary duties for brokers. 

Given the SEC’s long experience supervising the broker-dealer industry in its various 

forms, the extensive comments on the scope of broker-dealer fiduciary duties, and the 

Congressional directive on securities brokers selling proprietary products, it is likely the that the 

SEC will provide more nuanced proposal as to what broker-dealer activities require a fiduciary 

standard and which do not and what the scope of that fiduciary standard should be. Because the 

Rule Proposal would materially disrupt the securities broker-dealer industry and its customer 

accounts, it may be beneficial for EBSA to gain the experience of the SEC’s consideration of 

fiduciary standards for securities brokers. Issuing a broad-based rule of general application that 

would terminate long-standing industry practices and services before the industry’s primary 

regulator has completed formally considering precisely the same issue would be unsound policymaking. Indeed, it is likely that the cost of implementing the cost of any ERISA fiduciary 

standard for broker-dealers would be substantially reduced if such standards made an attempt to 

parallel the SEC’s ultimate decision on the same issue. Thus, we request that any new Rule 

Proposals or final rule issuances be deferred until the SEC has completed the process mandated 

by Section 913 of the Dodd-Frank Act. 

Soft Dollars 

In Section 28(e) of the Securities Exchange Act of 1934 Congress specifically stated that 

investment advisers, including investment advisers serving as ERISA fiduciaries who have 

investment discretion shall not be deemed to have violated their fiduciary duties under State or 

Federal Law solely by reason of his having caused the customer’s account to have paid a 

commission to a broker or dealer in excess of the commission another broker or dealer may be 

offering in the transaction in light of its overall responsibilities with the account if it determines 

that the brokerage’s brokerage and research services have reasonable value, provided that it 

discloses its broker allocation policies. 

This provision protects investment advisers receiving soft dollar research and other 

brokerage services from being deemed to have violated their ERISA fiduciary duties. But, if a 

broker-dealer is deemed an ERISA fiduciary under the Rule Proposal and provides such services 

and research to the investment adviser acting as ERISA fiduciary or a party in interest in lieu of 

the lowest trade execution price, it may be deemed to have violated ERISA’s fiduciary and 

prohibited transaction provisions. These types of soft dollar arrangements are specifically 

sanctioned by Congress. It would defeat the Congressional purpose in enacting protections for 

investment advisers receiving such soft dollar compensation from broker-dealers to create 

liability under ERISA in the same transaction for the broker-dealer paying the soft dollar 

compensation. 

Consequently, we request that EBSA consider ensuring that the soft dollar practices 

sanctioned by Congressional action in passing Section 28(e) of the Securities Exchange Act of 
Office of Regulations and Interpretations 

Employee Benefit Security Administration 

January 11, 2011 

Page 14 of 30 

1934 be explicitly sanctioned under any revised Rule Proposal or the promulgation of the final 

rule. For further information on soft dollar practices please refer to the SEC’s interpretive 

guidance on this issue.3

Misstatement of Standard of Proof for Claims Against Non-Fiduciaries 

The Rule Proposal claims that EBSA staff must prove that a service provider is a 

fiduciary to pursue claims against that service provider.4 But, that is untrue. The fiduciary status 

determination is only relevant to the types of claims that EBSA and private litigants pursue and 

the required mental state. ERISA’s statutory scheme provides that non-fiduciaries may be 

pursued for equitable remedies such as injunctions, turnovers, rescission, disgorgement and 

restitution if they are knowing participants in a fiduciary’s breach of duty or if they are partiesin-interest under 29 U.S.C. 1106(a). 29 USC §§1132(a)(3), 1132(a)(5) and 1132(l); Mertens v. 

Hewitt Associates, 508 US 248 (1993); Harris Trust and Savings Bank v. Salomon Smith Barney, 

530 U.S. 238, 120 S.Ct. 2180 (2000). 

The Harris Trust case merits further review. In it the Supreme Court specifically upheld 

actions against non-fiduciaries authorized by 29 USC §§1132(a)(3) and 1132(a)(5) against 

parties in interest to prohibited transactions and for participating in knowing breaches of the 

fiduciary’s duties. The Court stated: 

Section 502(l) contemplates civil penalty actions by EBSA against two classes of 

defendants, fiduciaries and “other persons.” The latter class concerns us here. 

Paraphrasing, EBSA shall assess a civil penalty against an “other person” who 

“knowingly participates in” “any . . . violation of . . . part 4 . . . by a fiduciary.” 

And the amount of such penalty is defined by reference to the amount “ordered by 

a court to be paid by such . . . other person to a plan or its participants and 

 

3

 SEC Release No. 34-54165 (July 18, 2006) 

4

 The Rule Proposal states: 

One of the most critical elements in bringing enforcement actions under the ESOP and CAP 

initiatives is establishing that a service provider is a fiduciary. In order to make this determination 

investigators must gather evidence to support a finding for each element of the five-part test. In all 

cases, the analysis requires extensive review of plan documents and contracts, client files, e-mails, 

investment documentation, accounting records, and interview statements to be obtained from 

service providers and their affiliates. Consequently EBSA investigators routinely devote 

disproportionate time and resources establishing all elements of the give-part test, rather than 

focusing on the precise misconduct at issue in a particular case . . . 

One of the most substantial impediments confronting CAP investigators when bringing 

enforcement actions under the CAP program is proving all elements of the current rule’s five-part 

test are met. As stated earlier, CAP investigators spend an inordinate amount of time gathering 

evidence to satisfy all elements of the five-part test rather than focusing on the misconduct in a 

particular case. 
Office of Regulations and Interpretations 

Employee Benefit Security Administration 

January 11, 2011 

Page 15 of 30 

beneficiaries in a judicial proceeding instituted by EBSA under subsection (a)(2) 

or (a)(5).” 

The plain implication is that EBSA may bring a civil action under § 502(a)(5) 

against an “other person” who “knowingly participates” in a fiduciary’s violation; 

otherwise, there could be no “applicable recovery amount” from which to 

determine the amount of the civil penalty to be imposed on the “other person.” 

This § 502(a)(5) action is available notwithstanding the absence of any ERISA 

provision explicitly imposing a duty upon an “other person” not to engage in such 

“knowing participation.” And if EBSA may bring suit against an “other person” 

under subsection (a)(5), it follows that a participant, beneficiary, or fiduciary may 

bring suit against an “other person” under the similarly worded subsection (a)(3). 

Section 502(l), therefore, refutes the notion that § 502(a)(3) (or (a)(5)) liability 

hinges on whether the particular defendant labors under a duty expressly imposed 

by the substantive provisions of ERISA Title I. (cites omitted) Harris Associates 

at 248-249. 

The Rule Proposal appears to be an end-around ERISA’s well-established statutory 

scheme requirement that participation in a fiduciary’s breach of duty and a culpable mental state 

be proven against non-fiduciary service providers to state a claim under ERISA. The culpable 

mental state is in the statutory scheme. It should not be rendered null and void by recasting those 

persons as fiduciaries. If EBSA or private litigants pursue non-fiduciary service providers, they 

need to prove that these defendants acted knowingly. The Rule Proposal appears to be a 

transparent attempt to evade the culpable mental state mandated by Congress for service 

providers to fiduciaries, plans and plan participants. 

The knowing participation requirement is similar to the requirements in other relevant 

regulatory schemes to require a culpable mental state to find liability for ancillary persons for the 

primary violation of another. For example, Section 20(e) of the Securities and Exchange Act of 

1934 (15 USC 78t(e)) provides for aiding and abetting liability to those who provide substantial 

assistance to the primary violator provided that 1) the defendant acted knowingly; and 2) that the 

action was brought by the U.S. Securities and Exchange Commission, not a private party. 

Indeed, the Securities and Exchange Act of 1934 corollary is especially apt because the Supreme 

Court cited ERISA’s knowing participant provisions and limitations on parties bringing matters 

in assessing the scope of aiding and abetting liability under the Exchange Act as it was stated in 

1993. Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 US 164, 175 

(1993). The SEC routinely brings cases requiring culpable mental states against aider and 

abettors and against principal violators under SEC Rule 10b-5, which requires scienter. We see 

no reason why EBSA investigators should not meet the same threshold. This would require that 

a case be based on what was known at the time rather than 20/20 hindsight. 

The ERISA statutory scheme as determined by Congress and 35 years of court precedent, 

including Supreme Court cases such as Mertens and Harris Associates, should not be overrun by 

just changing the definition of fiduciary to enable EBSA’s investigators to avoid needing to 

prove a culpable mental state against non-fiduciary service providers. 
Office of Regulations and Interpretations 

Employee Benefit Security Administration 

January 11, 2011 

Page 16 of 30 

Inadequate Regulatory Findings 

The Rule Proposal has inadequate regulatory findings to justify the imposition of the rule 

against the broad segment of securities broker-dealer service providers it targets. It make 

findings relating to some service providers such as pension consultants and valuation 

consultants, and then seeks to use that foundation to persons not mentioned in such findings, 

especially the entire broker-dealer industry. It also provides no referenced foundation for many 

of its findings. And when it does cite some source material for a finding, the source material 

does not support the finding. 

The Rule Proposal admits that this is a significant rule that will cost persons who would 

become subject to the fiduciary rule more than $100 million per year due to their “increased 

liability” but basically deems it a wash because that $100 million or some similar sum would 

theoretically go to plans instead. It also recognizes the costs of service providers needing to 

restructure transactions or modify business practices due to ERISA’s prohibited transaction 

prohibitions. But, the rule says that this is all justified because the expansion of the fiduciary 

standard would: 

1) discourage harmful conflicts of interest; 

2) improve service value; and 

3) enhance EBSA’s ability to redress abuses and more effectively and efficiently allocate its 

enforcement resources. 

Unfortunately, each of those vague findings as to securities broker-dealers is unsupported 

in the Rule Proposal. For these persons the Rule Proposal does not demonstrate any need for 

additional regulation over what are already highly regulated service providers. In analyzing the 

regulatory findings, it would be beneficial to determine what the Rule Proposal found. 

Finding #1 - “Consultants” who “in some cases” receive “compensation from investment 

companies whose products they recommend to the plan, which could lead them to steer the plans 

toward products for which they receive additional compensation. These arrangements can be 

harmful to plan participants because the plan may pay excessive fees which could lower returns.” 

1) As shown by the operative limitations “in some cases,” “could,” “can” “may” and 

“could” (for a second time) this finding is unabashed speculation. The Rule Proposal 

cites no concrete data demonstrating any likelihood that expanding the fiduciary standard 

to such “consultants” would increase returns or prevent excessive fees – not a single 

academic or industry study. The Rule Proposal cites no statistical averages, no 

alternative scenarios, no regressions, and no econometric analysis on a micro or macro 

level for its speculative conclusion outside of a reference to broker-sold mutual funds in 

footnote 30 of the Rule Proposal. 
Office of Regulations and Interpretations 

Employee Benefit Security Administration 

January 11, 2011 

Page 17 of 30 

2) The Rule Proposal seems deliberately vague when it refers to “Consultants.” Is this a 

reference to securities brokers? Is the compensation received from “products” a 

reference to commissions and Rule 12(b)(1) fees? Is it a reference to other consultants 

not subject to regulation by another regulator? Given the transparent speculation as to 

the value of the rule, EBSA should explicitly say who it is referring to in its speculative 

findings. If EBSA believes that the receipt of 12(b)(1) fees by broker causes an 

undisclosed conflict of interest, it should specifically say so. 

3) As to securities brokers and dealers, each relevant transaction is subject to the conflict 

disclosure requirements in SEC Rule 10b-10. The Rule Proposal’s apparent finding of 

non-disclosure of conflicts should identify what shortcomings EBSA sees in Rule 10b10’s conflict disclosure requirements. If there are no additional conflict disclosures to be 

required, then this does not provide a reasonable ground to extend the fiduciary standard 

to brokers and dealers subject to the requirements of SEC Rule 10b-10. At the very least 

the Rule Proposal should have identified the conflict disclosure shortcomings in federal 

securities laws in order to provide for a foundation for using conflict of interest disclosure 

to expand the fiduciary definition to brokers. It did not do so. 5

 5

 SEC Rule 10b-10 requires a securities broker or dealer to disclose the following for each transaction: 

a. The date and time of the transaction; 

b. Whether the broker or dealer is acting as an agent for the customer, as agent for some other 

person, as agent for both the customer and some other person, or as a principal, whether as a 

market maker or as a block positioner. 

i. If the broker or dealer is acting as an agent for the customer, for another person, or both 

the customer and another person, it is required to disclose the following: 

1. The name of the person from whom the security was purchased or to whom it 

was sold; 

2. The amount of remuneration received or to be received by the broker from the 

customer; 

3. Whether the broker or dealer is receiving payment for order flow in such 

securities and the source and nature of the compensation; 

4. The source and amount of any other remuneration received to be received by the 

broker or dealer. 

ii. If the broker or dealer is acting as a principal in its own account it is required to disclose: 

1. If the broker or dealer is not a market maker in the equity security and after 

having received the customer order, the broker or dealer purchased or sold the 

equity security from another person to offset a contemporaneous purchase or 

sale to the customer, the broker or dealer is required to disclose the difference 

between the customer’s price and the broker or dealer’s contemporaneous price 

2. The difference if any between the reported trade price to the market and the 

customer’s trade price. 

c. Whether any odd-lot differential or equivalent fee was paid by the customer and the amount of the 

fee; 

d. In transactions involving redeemable debt securities customers must be told that such debt security 

is redeemable before maturity; 

e. The dollar price and yield to maturity in debt security transactions; 

f. For debt security transactions effected on the basis of yield: 
Office of Regulations and Interpretations 

Employee Benefit Security Administration 

January 11, 2011 

Page 18 of 30 

4) Federal securities law also requires conflict of interest disclosures in registration 

statements and mutual fund prospectuses. For example, Regulation S-K requires the 

disclosure in registration statements and, by reference, certain periodic filings of security 

ownership of certain beneficial owners and management (Item 403), Transactions with 

Related Persons, Promoters and Certain Control Persons (Item 404); the Code of Ethics 

(Item 406), Corporate Governance (Item 407), Interests of Named Experts and Counsel 

(Item 509), and Indemnification of Directors and Officers (Item 702). SEC Form N-1A 

requires that mutual funds disclose to investors brokerage allocation and other practices 

and numerous other conflict of interests disclosures. 

Finding #2 - “Service Providers” to defined benefit plans have undisclosed conflicts of 

interest. 

1) The only source cite is made to a 2005 SEC study of pension consultants that 13 out of 24 

pension consultants or their affiliates had undisclosed conflicts of interests with the 

defined benefit plans serviced. 

2) The SEC study relates only to pension consultants. It does not relate to brokers, dealers, 

appraisers, or other service providers other than pension consultants. Any findings 

relating to pension consultants have zero bearing on the activities of brokers, appraisers, 

and other service providers who would be deemed ERISA fiduciaries under the Rule 

Proposal. As to service providers other than pension consultants this finding is irrelevant. 

3) The cited 2005 SEC study related to conflict disclosures pension consultants who were 

SEC-registered investment advisers, and thus were already ERISA fiduciaries. 

Consequently, EBSA is citing a source relating to undisclosed conflicts by fiduciaries to 

attempt to justify the expansion of the fiduciary definition to appraisers, brokers and other 

service providers who are not fiduciaries. That approach is improper. 

 i. The yield at which the transaction was effected, including the percentage amount of 

characterization (e.g. current yield, yield to maturity, or yield to call), and if effected at 

yield to call, the type of call, the call date and the call price; 

ii. The dollar price calculated from the yield; 

iii. If calculated on a basis of other than yield to maturity or if the yield to maturity is lower 

than the represented yield, then the yield to maturity must be disclosed along with the 

represented yield; 

g. For asset-backed debt securities representing an interest in or secured by a pool of receivables or 

other financial assets subject to prepayment, a statement that the actual yield of such asset-backed 

securities may vary according to the rate at which the underlying receivables or other financial 

assets are prepaid and a disclosure of the factors that affect yield, including minimum estimated 

yield, weighted average life, and the prepayment assumptions underlying yield; 

h. If a debt security has no rating, the fact of no rating must be disclosed unless the debt security is 

issued by a governmental entity; and 

i. If the broker or dealer, (or the correspondent clearing firm) is not a SIPC (Security Investor 

Protection Corporation), then a disclosure that there is no SIPC coverage on the transaction or for 

the asset. 
Office of Regulations and Interpretations 

Employee Benefit Security Administration 

January 11, 2011 

Page 19 of 30 

4) The Rule Proposal failed to disclose that the cited SEC report noted that in 2004 1,742 

SEC-registered investment advisers who have fiduciary duties under the Investment 

Advisers Act of 1940 disclosed providing pension consulting services. See U.S. Securities 

and Exchange Commission, Office of Compliance Inspections and Examinations, Staff 

Report Concerning Examination of Select Pension Consultants (Washington, DC: May 

16, 2005.) at footnote 2. Such registered investment advisers acting as pension 

consultants would be fiduciaries and already subject to the ERISA fiduciary 

responsibilities. 

5) The Rule Proposal further omits to state the actual number of pension consultants in 2010 

who are SEC-registered investment advisers and subject to fiduciary requirements. This 

number is likely substantially higher than 1,742 from 2004 due to the phase-in of SEC 

Rule 202a-2 relating to pension consultants. 

Finding #3 – Consultants, Appraisers and Advisors have abused their relationships with 

plans by recommending investments in exchange for undisclosed kickbacks from investment 

providers. 

1) This finding is unsourced in the Rule Proposal. Consequently, we cannot effectively 

determine what type of transaction this finding is intended to refer to. 

2) To the extent that this refers to securities broker-dealer commissions, SEC Rule 12b-1 

fees and mutual fund trailers, SEC Rule 10b-10 and other regulations require disclosure 

of this information to the customers. 

3) As to securities broker-dealers this finding should denote the “undisclosed kickbacks” 

and the disclosure shortcomings in the SEC regulatory regime. Because it did not do so, 

this finding does not support extending the fiduciary exemption to securities brokerdealers. 

Finding #4 – Consultants, Appraisers and Advisors have abused their relationships with 

plans by engaging in bid-rigging; 

1) This finding is unsourced in the Rule Proposal. Consequently, we cannot effectively 

determine what type of transaction this finding is intended to refer to. 

2) Successful “bid-rigging” requires a concentration of suppliers in that market segment. 

The securities broker-dealer industry is currently is highly diversified and deeply 

competitive. Before 1975 securities broker commissions were based on a fixed schedule 

set by the SEC and commissions levels had been fundamentally unchanged for many 

decades. But, on May 1, 1975 the SEC eliminated fixed commission rates and allowed 

for negotiated commissions. Commission rates immediately dropped substantially and 

have continued their downward migration as the industry has gained efficiency. Any 

attempts at “bid-rigging” among securities brokers would likely have no effect on the 
Office of Regulations and Interpretations 

Employee Benefit Security Administration 

January 11, 2011 

Page 20 of 30 

marketplace due the level of competition. This finding is thus unsupportable as it relates 

to securities brokers and dealers. 

Finding #5 – Consultants, Appraisers and Advisors have abused their relationships with 

plans by misleading plan fiduciaries about the nature and risk associated with the plans 

investments. 

1) This finding is unsourced in the Rule Proposal. Consequently, we cannot effectively 

determine what violations by securities brokers and dealers this refers to. 

2) Misleading plan fiduciaries about nature and risk of investments is actionable under the 

anti-fraud provisions state and federal securities laws. Indeed, under the FINRA 

suitability standard in NASD Rule 2310 there are added protections without having to 

prove fraud.6

 Further, new causes of action may arise from the SEC consideration of a 

fiduciary standard for broker and dealers. Nothing in the Rule Proposal demonstrates that 

current causes of action against securities brokers and dealers are inadequate and need 

additional remedies in light of the remarkable disruption of broker-dealer services that 

would ensue from imposing prohibited transaction standards on the broker-dealer 

industry. 

Finding #6 – Appraisers have been providing biased valuation opinions. 

1) The appraiser bias finding is sourced via footnote 25 of the Rule Proposal to a 2007 GAO 

report.7

 But, the report related to pension consultants, not appraisers. Using the GAO 

report to justify a bias finding against appraisers is improper. 

2) Further, this finding has no relevance to expanding the fiduciary standard to brokers and 

dealers using this finding to justify such an expansion to these service providers would be 

improper. 

 

6

 NASD Rule 2310 says: 

(a) In recommending to a customer the purchase, sale or exchange of any security, a member shall have reasonable 

grounds for believing that the recommendation is suitable for such customer upon the basis of the facts, if any, 

disclosed by such customer as to his other security holdings and as to his financial situation and needs. 

(b) Prior to the execution of a transaction recommended to a non-institutional customer, other than transactions with 

customers where investments are limited to money market mutual funds, a member shall make reasonable efforts to 

obtain information concerning: 

(1) the customer’s financial status; 

(2) the customer’s tax status; 

(3) the customer’s investment objectives; and 

(4) such other information used or considered to be reasonable by such member or registered representative in 

making recommendations to the customer. 

7

 GAO, Conflicts of Interests Involving High Risk of Terminated Plans Pose Enforcement Challenges, Defined 

Benefit Pension Report (June 2007). 
Office of Regulations and Interpretations 

Employee Benefit Security Administration 

January 11, 2011 

Page 21 of 30 

Finding #7 - Pension Consultants have an “Implied Bias” 

1) The pension consultant implied bias finding is found in footnote 25 of the Rule Proposal. 

The finding in the Rule Proposal that there is an “implied bias” that taints pension 

consultants’ advice derives from a 2007 GAO Report. But, the Rule Proposal 

misrepresents the GAO Report’s actual findings. In fact, the sentences in the GAO 

Report immediately following the referenced return information state: 

Because many factors can affect returns, and data and modeling 

limitations limit the ability to generalize and interpret the results, this 

finding, while suggestive, should not be considered as proof of causality 

between consultants and lower rates of return. Lack of data prevented a 

similar study of PBGC trusteed plans or high risk plans likely to terminate. 

Although SEC staff have reported that some of the consultants examined 

in its study have since taken some corrective action, this finding 

nevertheless illustrates the importance of detecting the presence of 

undisclosed conflicts of interest among ongoing plans, and likely among 

terminated plans. However, independent experts, EBSA and PBGC 

officials all concur that while analyzing rates of return is a useful first step, 

determining whether conflicts resulted in financial harm to individual 

plans and the magnitude of that harm is often extremely difficult without a 

detailed forensic audit. GAO Report at pages 3-4. 

In substance, the Rule Proposal morphs a GAO report which says that analyzing rates of 

return is inconclusive, “suggestive” and a “useful first step” to a definitive regulatory 

finding of “implied bias” that taints the entire pension consulting industry, and causes 

lower returns. As demonstrated by the GAO report the finding relied on, this “implied 

bias” regulatory finding misrepresents the finding of its source material and is improper. 

Although the EBSA Rule Proposal mentioned the SEC study, it failed to reference what 

the SEC did with the results of the study. It issued rules causing the pension consultants 

to fall within the requirements of the Investment Advisors Act of 1940 and made the 

pension consultants eligible to be registered as investment advisers under the Investment 

Advisers Act of 1940 if they consulted with plans having an aggregate value of $50 

million or more. SEC Rule 203a-2. There is no reference to any study or finding that 

this is an inadequate regulatory regime. Plus, as previously stated, investment adviser 

registration imposes fiduciary duties on pension consultants. 

2) Since this finding related only to pension consultants, it has no relevance to expanding 

the fiduciary standard to appraisers, brokers and dealers using this finding to justify such 

an expansion to these service providers would be arbitrary and capricious. 
Office of Regulations and Interpretations 

Employee Benefit Security Administration 

January 11, 2011 

Page 22 of 30 

Finding #8 – Appraisers have been providing incompetent valuation opinions 

1) This finding is unsourced in the Rule Proposal. 

2) This finding does not relate to securities brokers and dealers. 

Finding #9 – Appraisers have been providing unreliable valuation opinions. 

1) This finding is unsourced in the Rule Proposal. 

2) This finding does not relate to securities brokers and dealers. 

In sum, none of these findings explicitly relates to the securities broker-dealer industry. 

None of these findings justifies the enormous costs to the securities broker-dealer industry and 

the complete restructuring of broker-dealer services required by the Rule Proposal. 

Indeed, the following table clearly summarizes the above analysis. 

Continue to Next Page
Office of Regulations and Interpretations 

Employee Benefit Security Administration January 11, 2011 Page 23 of 30 

Finding 

No. Finding Description

Finding 

Relevant to 

Securities 

Brokers and 

Dealers

Source Cited 

in Rule 

Proposal Com

1 

Consultants, Appraisers and Advisors have abused their relationships with plans by recommending investments in exchange for undisclosed kickbacks from investment providers Unclear No 

No reference to alleged ssecurities broker-dealer’s under securities law 

2 

“Service Providers” to defined benefit 

plans have undisclosed conflicts of interest Unclear 

Yes - 2005 SEC Study on Pension Consultants 

Source material relates oconsultants, most of who

fiduciaries due to their SEregistration. Nothing citeNo reference made to any securities broker-dealer’s under securities laws. 

3 

Consultants, Appraisers and Advisors have abused their relationships with plans by recommending investments in 

exchange for undisclosed kickbacks from investment providers Unclear No 

No reference made to any securities broker-dealer’s under securities laws. Unreference to mutual fund 12(b)(1) fees 

4 Consultants, Appraisers and Advisors 

have abused their relationships with plans by engaging in bid-rigging Unclear No 

Bid-rigging requires a co

suppliers. Securities brokhighly diverse and compecommissions have been i
Office of Regulations and Interpretations 

Employee Benefit Security Administration January 11, 2011 Page 24 of 30 

Finding 

No. Finding Description

Finding 

Relevant to 

Securities 

Brokers and 

Dealers

Source Cited 

in Rule 

Proposal Com

5 

Consultants, Appraisers and Advisors have abused their relationships with plans by misleading plan fiduciaries about the nature and risk associated with the plans investments Unclear No 

No finding as to inadequremedies under securities 

6 

Appraisers have been providing biased valuation opinions No 

Yes - GAO Report 

GAO Report is on pensioappraisers; pension consusubject to ERISA fiduciainvestment advisers 

7 

Pension Consultants have an “Implied Bias” No 

Yes - GAO Report 

Pension Consultants are aERISA fiduciary requireminvestment advisers; GAO support “Implied Bias” fi

8 Appraisers have been providing 

incompetent valuation opinions No No 

9 Appraisers have been providing 

unreliable valuation opinions No No 
Office of Regulations and Interpretations 

Employee Benefit Security Administration 

January 11, 2011 

Page 25 of 30 

Benefit Analysis 

Based on the above unsupported findings of problems to be fixed in reference to the 

securities broker-dealer industry, EBSA found that the Rule Proposal will 1) discourage harmful 

conflicts; 2) improve service value; and 3) enhance the Department’s ability to redress abuses 

and more effectively and efficiently allocate resources. 

In support of these benefits, EBSA cites several times to the 2007 GAO report finding of 

an apparent correlation of 130 basis points. But, as stated above, this use of the GAO report 

misrepresents the findings of the GAO report. The GAO report cannot be used for the finding of 

regulatory benefits because, as the report stated, in 2007 EBSA represented to the GAO that: 

“while analyzing rates of return is a useful first step, determining whether conflicts resulted in 

financial harm to individual plans and the magnitude of that harm is often extremely difficult 

without a detailed forensic audit.” Further the GAO Report also stated: 

Because many factors can affect returns, and data and modeling limitations limit 

the ability to generalize and interpret the results, this finding, while suggestive, 

should not be considered as proof of causality between consultants and lower 

rates of return 

Thus, EBSA should not use the GAO report as the basis for a finding of regulatory benefits and 

its use of the report for that purpose in the Rule Proposal directly contradicts the evaluation of 

the data set that it made to the GAO in 2007. Moreover, the GAO report is, in fact, not relevant 

to the Rule Proposal because the GAO report focuses on pension consultants who are already 

ERISA fiduciaries as registered investment advisers. The GAO report makes no relevant 

findings as to the apparent intended targets of the Rule Proposal, appraisers and securities 

broker-dealers. 

 In its benefit analysis, EBSA also cites to the 2005 SEC report on pension consultants. 

But that report only had a sample size of 24 and the referenced pension consultants were already 

ERISA fiduciaries because they were registered investment advisers. That report adds nothing to 

justifying the Rule Proposal against appraisers and securities broker-dealers. 

 The Rule Proposal also referenced three studies on the value of brokers in the sale of 

mutual funds in footnote 30. While we have not canvassed the relevant academic literature due 

to time constraints, we note that these studies all apparently relate to one product and one service 

offered by the broker-dealer industry (broker-sold mutual funds) but the Rule Proposal is not so 

limited. It incorporates the whole panoply of products in the broker-dealer universe, including 

stocks, notes, bonds, structured notes, exchange-traded funds, IPOs, secondary offerings, real 

estate syndications, options, securities derivatives, security-based swaps, etc. If EBSA has issues 

with the broker-sold channel for mutual funds, it should specifically address those concerns 

rather than use it as a rationale for causing a complete restructuring of the broker-dealer 

industry’s service models. 
Office of Regulations and Interpretations 

Employee Benefit Security Administration 

January 11, 2011 

Page 26 of 30 

 Further, we question the currency of the mutual fund studies in light of recent industry 

developments. In response to new fee disclosure requirements by plan sponsors the mutual fund 

industry has rolled out a new class of mutual fund shares – the “R” shares. These shares do not 

have Rule 12b-1 or shareholder services fees. American Funds launched an R6 share class in 

May 2009. Principal Financial Group offers R shares on Principal Trust Target Date Collective 

Investment Funds. In December 2010 J.P. Morgan Asset Management introduce an R6 share 

class for its mutual funds.8

 EBSA should anticipate that other mutual fund providers will be 

following suit. 

Thus, the represented anticipated benefits relating to the securities broker-dealer do not 

withstand scrutiny. First, as to discouraging harmful conflicts nothing in the in the Rule 

Proposal demonstrates any shortcomings in the mandatory conflict disclosures required of 

securities broker-dealers under federal securities laws. As stated above federal securities law 

requires disclosure of material conflicts of interests and SEC Rule 10b-10 provides specific 

conflict disclosures that must be provided on every single securities transaction. As to securities 

broker-dealers the Rule Proposal had no mention of non-disclosure of “harmful conflicts.” Thus, 

as to securities broker-dealers this cited benefit has no discernible basis. There is no basis to 

believe that additional conflict disclosures would be made beyond those already required of 

broker-dealers under federal securities laws. 

Second, EBSA found that the Rule Proposal “will” improve service value. As to 

securities broker-dealers that is demonstrably untrue. Plans, their participants and the 

beneficiaries will lose access to margin accounts, the ability to use options and short sales as 

hedges, the ability to derive income from securities lending, access to IPO and secondary 

offering allocation, and the ability to resolve trade disputes through transfers to and from brokerdealer error accounts. All these limitations also reduce available revenue streams for brokerdealers, so plans, their participants and beneficiaries should expect substantial price increases for 

the remaining services that broker-dealers would be able to provide. Indeed, the Rule Proposal 

acknowledges this in Section 7 by saying that service providers “might charge higher fees to plan 

clients.” So, while a non-plan account could expect to continue having low commission costs 

subsidized by other revenue streams, there is a substantial risk that such commission prices 

would no longer be available to plans, their participants and beneficiaries because of the 

increased compliance costs and lack of any other income streams from those accounts. In sum, 

the Rule Proposal will likely be a substantial net negative for plans receiving broker-dealer 

services in terms of both services provided and the costs of those services. 

Third, EBSA finds a benefit in making it easier for it to “redress abuses” and allow it to 

better “allocate resources.” As stated above, the Rule Proposal does not say that the U.S. 

Supreme Court held in Harris Associates that EBSA can seek remedies against current nonfiduciaries if it proves knowing participation and that the ERISA’s statutory scheme requires 

proof of a culpable mental state in actions against non-fiduciaries. So, it appears that making it 

 

8

 “JPM Launches R Class free of 12(b)-(1) fees” Investment News, December 13, 2010, page 3, found online at 

http://www.investmentnews.com/apps/pbcs.dll/article?AID=/20101212/REG/312129977 
Office of Regulations and Interpretations 

Employee Benefit Security Administration 

January 11, 2011 

Page 27 of 30 

easier to “redress abuses” is, in other words, an attempt to avoid ERISA’s statutory requirements 

that a culpable mental state should be proven when pursuing remedies under ERISA’s statutory 

scheme against ancillary figures. 

Regulatory Flexibility Act: Impact on Small Businesses 

 We believe that EBSA has taken insufficient steps to ensure compliance with the 

Regulatory Flexibility Act (5 USC 601 et seq.) in connection with extending the ERISA 

fiduciary standard to securities brokers and dealers. The sole foundation for the determination of 

the effect on small business was based on estimates extrapolated from payments of $5,000 or less 

to service providers as reported in the 2007 Form 5500. EBSA then concluded that this would 

amount to 5,170 service providers with revenues of less than $7 million, but that it believed that 

this number was overstated. 

 We object to EBSA’s methodology in connection with the securities broker-dealer 

industry because it makes no reference the information available about the industry. First, 

FINRA reports on its website that there are 4,620 brokerage firms registered with FINRA which 

includes 165,920 branch offices and 636,340 registered securities representatives. Of those 

4,620 FINRA-registered brokerage firms, FINRA classified 4,306 of them as small firms for the 

purposes of its Board of Directors election on August 12, 2010. It also classified 220 firms as 

mid-sized and 172 firms as large. 

 But, that does not tell the whole story. Many broker-dealers provide platforms for small 

business entities. The representatives run their own offices and are not employees. They 

generally have and advertise their own brand. The broker-dealer provides the platform for the 

independent representative and his or her small business entity to operate. Most of these 

independent representative firm branch offices will qualify as their own small business entities. 

Schedule A attached shows information derived from a list of independent representative firms 

posted on www.investmentnews.com.9

 The 88 independent representative firms on Schedule A 

show a total of 126,643 registered representatives, with 17,456 employees. Assuming that each 

employee is a registered person, then that would yield 109,187 independent representatives from 

those 88 firms. Assuming an average of three registered representatives per independent 

representative office, that would yield 36,396 small business entities affected by the Rule 

Proposal. This is a reasonable number given that FINRA has stated that there are 165,920 

registered broker-dealer branch offices. When the number of small broker-dealers is added to 

that, the total number can surpass 40,000 small business entities, or approximately 8 times the 

number of small business entities referenced in the Rule Proposal. 

 This number of small businesses is not the complete number because this is just for the 

securities broker-dealer business. This does not include other small businesses that may be 

affected by the imposition of the Rule Proposal, especially in the appraisal industry. 

 

9

 Investment News asks that questions on the data set be directed to: Kristen Hensley at 

khensley@investmentnews.com or 212-210-0451. 
Office of Regulations and Interpretations 

Employee Benefit Security Administration 

January 11, 2011 

Page 28 of 30 

 We also object because EBSA has apparently made no attempt to survey the abovereferenced small business entities, instead relying only on Form 5500 reports from plan 

administrators servicing over 100 employees. It would not be difficult to survey the securities 

broker-dealer industry. The SEC posts a complete list of registered broker-dealers and addresses 

on its website in a spreadsheet format.10 Online service providers could have compiled the 

survey results without imposing much of a burden on EBSA staff. 

 EBSA also claims in the Rule Proposal that it is unable to estimate the increased business 

costs if the small business entity and that such costs would include purchasing fiduciary liability 

insurance. We believe that EBSA could have surveyed insurers and determined a range of 

marginal additional costs per covered employee. 

 EBSA also estimated in the Rule Proposal that it would have an average impact of only 

$1,900 to review the services providers’ contracts and operations to seek compliance with 

ERISA fiduciary status requirements. We don’t know the source of that assessment. The Rule 

Proposal also states that compliance will take 19 hours of legal work at a billable rate of $119 per 

hour which amounts to $2,261. Regardless of the precise number, we believe that this 

assessment materially understates the true costs by several magnitudes. As explained above, the 

Rule Proposal would be incredibly disruptive to broker-dealers, require major changes to 

business operations, and require the review of each customer account to determine whether it is 

plan account, and if so, how the contracts would need to be revised. In our estimation the 19 

hour estimation understates the reality of the task by several magnitudes. Further, most of the 

small broker-dealers and other businesses referenced above are too small to employ dedicated inhouse legal counsel. Consequently, they will need to engage qualified outside securities counsel. 

And we can assure you that the going rate for qualified securities counsel substantially exceeds 

$119 per hour. 

 

 So, while EBSA has come out with an estimated undiscounted cost of legal and 

compliance review derived from the Rule Proposal of less than $18 million over ten years, we 

believe that the true legal review and compliance costs will be several times that amount. 

 We believe that EBSA likely could have obtained more complete and accurate cost 

numbers had it surveyed those it intends to place under the fiduciary standard. This information 

is simply not going to be available from a review of one year of Form 5500 reports. 

Statutory Authority 

 Finally, we are concerned that EBSA lacks statutory authority for its proposed expansion 

of the definition of fiduciary in the securities broker-dealer context. We understand that EBSA 

has said in the Rule Proposal that the previous approach to fiduciary status is not “compelled by 

the statutory language” and apparently is not seeking comments on this issue. But, nonetheless 

 

10 http://www.sec.gov/foia/docs/bdfoia.htm 
Office of Regulations and Interpretations 

Employee Benefit Security Administration 

January 11, 2011 

Page 29 of 30 

we do not think that securities broker-dealers were meant to be designated as fiduciaries under 

ERISA’s statutory scheme. 

In 1974 when ERISA passed there was a well-understood difference between investment 

advisers who had fiduciary duties under the Investment Adviser Act of 1940 and securities 

brokers and dealers who had no such duties and operated under the Securities Exchange Act of 

1934. These types of service providers provide different types of services. We believe that 

Congress understood that securities brokers and dealers were not ERISA fiduciaries because it 

prohibited fiduciaries from engaging in so many of the activities and services that brokers and 

dealers had performed for decades for their customers. These activities and services included 

margin loans, margin accounts, uncovered options, short selling and securities lending. 

Moreover, Congress could have specifically referenced securities brokers and dealers but failed 

to do so. It is unlikely that Congress intended to incorporate an entire industry supervised by 

another federal regulator into the ERISA fiduciary standard by implied inference derived from 

statutory language. 

This view is further reinforced when Congress revisited the fiduciary issue in 1975 a year 

after passing ERISA. In response to industry changes stemming from the end of fixed 

commissions in May 1975, Congress added Section 28(e) to the Securities and Exchange Act of 

1934. It states that investment advisers, including investment advisers serving as ERISA 

fiduciaries, who have investment discretion shall not be deemed to have violated their fiduciary 

duties under State or Federal Law solely by reason of his having caused the customer’s account 

to pay a commission to a broker or dealer in excess of the commission another broker or dealer 

may be offering in the transaction in light of its overall responsibilities with the account if it 

determines that the brokerage’s brokerage and research services have reasonable value, provided 

that it discloses its broker allocation policies. Note that Congress provided this protection only 

to investment advisers, not securities brokers and dealers. It would have made no policy sense 

to exempt the recipient of the soft dollars from ERISA’s fiduciary duties but to deem the payor 

of the soft dollars to have engaged in a prohibited transaction under ERISA (by paying a party in 

interest while recommending securities transactions) for the same transaction. This shows that in 

1975, a year after Congress enacted ERISA, Congress did not view the activities of securities 

brokers and dealers, such soliciting trades, to bring them under the ERISA fiduciary standards. 

Otherwise brokers and dealers would have also received a soft dollar fiduciary exemption along 

with the investment advisers. 

Finally, Congress revisited this issue again just last year in the Dodd Frank Act. 

Congress considered industry changes in the securities broker-dealer business to merit revisiting 

fiduciary standards for brokers. The Dodd-Frank Act added §15(k)(1) to the Securities 

Exchange Act of 1934 to provide the SEC with the statutory authority to impose such a standard 

by regulation. The clear inference is that Congress and the SEC deemed there to be serious 

questions about the SEC’s statutory authority to engage in such rulemaking absent that explicitly 

authority. 
Office of Regulations and Interpretations 

Employee Benefit Security Administration 

January 11, 2011 

Page 30 of 30 

Pointedly, Congress did not provide similar authority to EBSA in the Dodd-Frank Act. 

Since EBSA is promulgating the Rule Proposal under it general rulemaking authority rather than 

specific rulemaking authority relating to the securities broker-dealer industry, there should be 

serious questions as to why Congress did not specifically grant EBSA the same authority it 

granted the SEC and whether EBSA needs specific rulemaking authority relating to the securities 

broker-dealer industry to promulgate the proposed rule. 

We look forward to EBSA’s consideration of these important matters and hope that our 

comments will be of use. 

 Very truly yours, 

 John R. Fahy 

 Whitaker, Chalk, Swindle & Sawyer, L.L.P. 

 jfahy@whitakerchalk.com 

 Committee Vice-Chair, Securities 

Committee of Business Law Section of the State 

Bar of Texas 

(Primary Author) 

 Carol Mattick 

Carol Bavousett Mattick, P.C. 

carol@cbmattick.com 

Committee Chair, Securities Committee 

of the Business Law Section of the 

State Bar of Texas 

 

Dan Waller 

 Secore & Waller, LLP 

 dan@secorewaller.com 

Member, Securities Committee of the 

 Business Law Section, State Bar of Texas 

 Chairman, Securities Committee, American 

Association of Attorney-Certified Public 

Accountants 
1

Schedule A 

No. 

Independent Representative 

Broker-Dealer 

Number 

of Reps 

Full-Time 

Employees 

Estimated Net 

Independent 

Reps (Number 

of Reps minus 

Number of 

Full-Time 

Employees) 

1 LPL Financial 11,214 2,200 9,014

2 NYLIfe Securities LLC 7,793 216 7,577

3 Lincoln Financial Network 7,682 895 6,787

4 Ameriprise Financial Services 7,658 2,400 5,258

5 Metlife Securities, Inc. 6,631 265 6,366

6 AXA Advisors, LLC 5,883 47 5,836

7 Northwestern Mutual 5,752 448 5,304

8 H.D. Vest Financial Services 5,175 280 4,895

9 Raymond James Financial Services, Inc. 3,278 2,338 940

10 Park Avenue Securities, LLC 2,988 107 2,881

11 Financial Network Investment Corp. 2,413 219 2,194

12 ING Financial Partners 2,389 62 2,327

13 Princor Financial Sercices Corp. 2,370 72 2,298

14 Waddell & Reed, Inc. 2,359 299 2,060

15 New England Securities, Inc. 2,318 265 2,053

16 Genworth Financial Securities 2,100 100 2,000

17 Securities America, Inc., 1,933 412 1,521

18 John Hancock Fianncial Network 1,896 172 1,724

19 Ameritas Investment Corp 1,886 130 1,756

20 NFP Securities 1,750 170 1,580

21 Woodbury Financial Services 1,700 224 1,476

22 Cambridge Investment Research, Inc. 1,604 345 1,259

23 National Planning Corp. 1,593 173 1,420

24 SagePoint Financial, Inc. 1,554 242 1,312

25 Royal Alliance Associates, Inc. 1,549 207 1,342

26 Primevest Financial Services, Inc. 1,448 244 1,204

27 TransAmerica Financial Advisors, Inc. 1,432 135 1,297

28 Securian Financial Services, Inc. 1,394 113 1,281

29 Commonwealth Financial Network 1,314 435 879

30 Invest Financial Corp. 1,227 167 1,060

31 ProEquities, Inc. 1,210 101 1,109

32 FSC Securities Corpo. 1,064 157 907
2

No. 

Independent Representative 

Broker-Dealer 

Number 

of Reps 

Full-Time 

Employees 

Estimated Net 

Independent 

Reps (Number 

of Reps minus 

Number of 

Full-Time 

Employees) 

33 Multi-Financial Securities Corp. 980 124 856

34 Next Financial Group, Inc. 1,027 138 889

35 Caderet Grant & Co., Inc. 990 112 878

36 The O.N. Equity Sales Co. 868 39 829

37 

Capital Financial Group, Inc./H Beck, 

Inc. 836 77 759

38 Uvest 736 141 595

39 Wells Fargo Advisors Financial Network 745 76 669

40 Walnut Street Securities, Inc. 731 265 466

41 

M Holdings Securities, Inc. (M 

Securities) 706 54 652

42 Equity Services, Inc. 670 45 625

43 First Allied Securities, Inc. 663 231 432

44 

American Portfolio Financial Services, 

Inc. 647 72 575

45 Centaurus Financial, Inc. 644 50 594

46 Questar Capital Corp 614 74 540

47 Sigma Financial Corp 608 100 508

48 Investors Capital Corp 577 77 500

49 National Securities Corp 568 94 474

50 SII Investments Inc. 556 68 488

51 Sammons Securiites Co., LLC 526 118 408

52 Great American Advisors, Inc. 500 33 467

53 Hornor Townsend & Kent, Inc. 488 54 434

54 Tower Square Securities, Inc. 467 265 202

55 Investacorp, Inc. 460 65 395

56 Triad Advisors, Inc. 450 41 409

57 QA3 Financial Corp. 444 51 393

58 Lincoln Invesmtment Planning, Inc. 432 200 232

59 Secuirity Service Network, Inc. 425 55 370

60 WRP Investments, Inc. 375 25 350

61 PlanMember Seurities Corp. 370 98 272

62 Investment Centers of America, Inc. 366 79 287

63 

Berthel Fisher and Company Financial 

Services, Inc. 352 65 287
3

No. 

Independent Representative 

Broker-Dealer 

Number 

of Reps 

Full-Time 

Employees 

Estimated Net 

Independent 

Reps (Number 

of Reps minus 

Number of 

Full-Time 

Employees) 

64 Summit Brokerage Services, Inc. 350 70 280

65 United Planners Financial Services 342 46 296

66 Independent Financial Group 315 28 287

67 Pacific West Financial Group 309 42 267

68 Geneos Wealth Management, Inc. 302 49 253

69 Crown Capital Securities, LP 302 25 277

70 LaSalle St Securities, Inc. 273 34 239

71 VSR Financial Sercices, Inc. 267 77 190

72 Kovack Securities, Inc. 259 41 218

73 J.W. Cole Financial, Inc., 250 29 221

74 TFS Securities, Inc. 250 15 235

75 Sterne Agee Financial Services, Inc. 220 20 200

76 Girard Securities, Inc. 200 30 170

77 First Midwest Securities, Ic. 197 28 169

78 Harbour Investments, Inc. 194 19 175

79 CFD Investments, Inc. 185 43 142

80 Wall Street Financial Group, Inc. 163 17 146

81 vFinance Investments, Inc. 154 75 79

82 Ensemble Financial Services, Inc. 150 48 102

83 

IMS Securities, Inc./IMS Financial 

Advisors, Inc. 135 15 120

84 Prospera Financial Services, Inc. 100 31 69

85 Coordinated Capital Securities, Inc. 86 7 79

86 GBS Financial Corp. 65 9 56

87 Synergy Investment Group 60 19 41

88 Spire Investment Partners, LLC 50 13 37

 

Total: 126,643 17,456 109,187

Source: Investment News Databook 2010 – December 27-31, 2010